My first rendezvous with finance

Ola(well I ended a post with this word some days ago and my brother corrected me to tell me that this in fact means “Hi” in Spanish so the mistake now stands corrected)

So I have started gaining some momentum in my GD\PI prep and have joined a group being taught by an IIMA alumnus. I’ve had just one class till now but it was good and I learnt a few things that I will talk about here in just a moment. Apart from that, I just came to know that IIMB had come out with a new shortlist and it was a little jitter but I checked again and my name is still there, but my interview has been postponed quite a bit.

OK, back to the class I had. So this was my first tryst with finance and I have to say that what little that he taught yesterday was really interesting. He started to talk about “convertibility”. Now this term refers the conversion of a particular currency into another, say $ into Rs.Now any country has certain laws governing the freedom with which one can convert currency from one form to another. Several factors affect the path that a nation chooses to follow in its policies regarding convertibility.

Just a few terms first,

Full Convertibility
No Convertibility
Current Account Convertibility
Capital Account Convertibility

Now the first two terms are self explanatory, where one would have absolute or no freedom.

Current Account Convertibility: Say if person X produces some product in India, and sells it in the global market using some account. Now the payment he receives in the market is of foreign currency, he can then convert that money back to his own national currency and this freedom would refer to Current Account Convertibility.

The last term refers to the permission that one can keep money in an account and he can convert into any form using that account.

Now, coming back to the initial question, “How does a country decide on its level of convertibility”?

Any decision regarding this will be taken keeping an eye on the dependence of the country’s’ dependence on foreign exchange.

Now say if we look at India, We follow a regime of current account convertibility, so the exchange of currencies can take place freely as far as trade is concerned, but we cannot arbitrarily convert Rs. To dollars without answering to the RBI.This is done so that an investor does not put the country’s economy in a pickle.
For example, say an investor buys some $20 billion worth of Rupees. Now he can wait and watch for the rupee to appreciate and then he will sell the Rupees for dollars, as a result others will also start converting Rupees into dollars since rupee starts to fall due to excess supply, as a result this could trigger a chain reaction and you would have a crisis with the rupee in the doldrums. So, we choose a more conservative approach by opting for Current Account Convertibility., to avoid such situations. This is in fact what actually happened in the East Asian Financial Crisis where the Currencies devalued to almost 1\8th of their value in a span of 3-4 days.

So that was a little bit about what constituted the first lecture. There was also some other stuff like inflation, interest rates, FIIs but I will blog about that later.

Apart from the techie stuff, we also learnt a little about the “Charmed” life of an Investment banker. While any MBA aspirant prepping to got into an IIM would dream of a PPO from Goldman Sachs, Lehman Brothers and the likes, it is a really tough job to be an investment fund manager. Your ass is on the line for every move you make. Since the stakes are so high, small mistakes cost big time and careers don’t take that much time to shatter. Anyway, that discussion is for another day at another place, at IIMA maybe :).

I have a 3 hour class tomorrow and I am really looking forward to it, I’ll blog about it when I get back. Plus I can’t wait for my brother to get back from Chicago tomorrow. He just bought a Dell laptop for me and I am almost jumping out of my shoes to see that. Ahhh, finally I’ll be able to blog while lying on the bed. May god bless the inventor of the Laptop!

Apart from the preparation, I also wanted to talk about another natural disaster that you all must be aware of, a few days ago an earthquake and then a following Tsunami wreaked havoc in the lives of lakhs of people. It is really sad to see that almost 30 thousand people have been fatal victims to this fury expressed by nature. I would urge all of you to donate what you can and do everything that you can do. It could be a monetary donation or maybe just a prayer, just does that little bit to make the lives of those ill –fated people a little easier. May the dead rest in peace.

Gracias
Rohit